Is leverage increasing? Evidence of increasing leverage is an important warning sign of potential house price weakness. To date, that evidence is lacking. The value of housing has increased rapidly since 2011. However, mortgage debt outstanding has not increased over this period; in fact, it has declined slightly. Although homeowners currently have a near-record amount of equity in their homes, they have not tapped it so far. As things stand currently, the high level of equity provides homeowners with a substantial cushion against house price fluctuations. Of course, homeowners may decide in the future to increase their leverage, especially if the pace of wage growth fails to accelerate and the income of the majority of Americans continues to stagnate. In that situation, households will be less resilient in the event the economy sags, and house price risk will increase. This last point highlights what is likely to be the “canary in the coal mine.” As long as leverage remains low, homeowners will remain resilient in the face of economic fluctuations. However, if leverage creeps up, homeowners’ financial cushion will shrink, leaving them more vulnerable to economic shocks. In sum, this analysis suggests that, aside from isolated areas, we don’t need to worry about house prices — yet.
US Loan Level vs Median House Price-to-income Ratios
Loan Level PTI And Threehold (Q4 2015)
Source: Freddie Mac, Moody’s Analytics
Source: Freddie Mac
This table reinforces the importance of comparing PTIs to local norms. For instance, San Jose has the highest current PTI (7.1) of the ten metros, but historical experience in San Jose indicates that the ratio in San Jose has to exceed 10.0 before it merits further scrutiny. In contrast, Miami’s current ratio of 3.8 is well above the normal range of typical PTI values in Miami. Are credit conditions deteriorating? Deteriorating credit conditions suggest higher defaults and foreclosures in the future, which, in turn, may put downward pressure on house prices. However, delinquency and default reveal themselves only over time, making them relatively poor warning signals of an impending bubble. Fortunately, other measures may provide more- timely indications of weakening credit conditions. For example, the Mortgage Bankers Association index of credit availability has been increasing steadily since 2011, suggesting underwriting standards may be loosening. However,
this increase does not appear significant when compared to the levels the index reached during the house price bubble. Increases in mortgage fraud may signal lax underwriting. CoreLogic’s mortgage fraud risk index shows that Miami is the one metro with an unusually-high loan-level PTI ratio compared to the average index for the other nine metros on the watch list. The index for Miami has increased sharply in the last few years, but no such trend is visible for the average of the other nine metros. Increases in house flipping may also indicate overly-optimistic investor expectations of future house price appreciation. Currently, flipping represents just over six percent of home sales in the Miami metro — well below the peak of around 10 percent, according to Core logic. However, the share of house flipping in Miami has been steadily creeping up since 2008.
ATTOM Data Solutions • P9
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